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By XE Market Analysis September 19, 2014 3:40 am
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    XE Market Analysis: Europe - Sep 19, 2014

    Sterling rallied as Scotland voted "No" to independence, avoiding what would have been a chaotic break away from the United Kingdom. With 31 out of the nation's 32 council areas having declared after Thursday's vote, as of the time of writing, the No side has an unassailable lead. Cable rallied to a 17-day high of 1.6525, though has since settled lower, to the mid-1.64s, while EUR-GBP dove to a two-month low of 0.7810. There are reasons that sterling's upside will be curtailed. The dust will quickly settle as all six polling companies covering the build-up to the vote had predicted a No vote, and markets will quickly return attention to fundamentals, with benign inflation and wage data this week leaving the BoE on an on-hold-for-now policy stance. There will also be political fallout, with more devolution to Scotland and possible constitutional changes to come. Elsewhere, USD-JPY surged to a major-trend high of 109.46. EUR-JPY and other yen crosses also posted new highs. The yen underperformed after Japan's Cabinet Office downgraded its economic assessment on the back of weak consumption, flat exports and weak industrial output. Japan's all-industry activity index also came in sub-forecasts at -0.2%, and BoJ boss Kuroda repeated that Japan is only halfway to achieving the 2% CPI target. EUR-USD traded in the low 1.29s for the most part.

    [EUR, USD]
    EUR-USD's rebound from Thursday's 14-month low of 1.2834 stalled at 1.2930 and the euro subsequently dipped back below 1.29. We remain EUR-USD bearish. The Fed raised its interest rate projection this week, while the EU last week implemented fresh sanctions on Russia, the region's fourth biggest trading partner, and which should help maintain the ECB's easing bias. We target EUR-USD to the 2013 low at 1.2745. Key resistance is marked at 1.2995-1.3000.

    [USD, JPY]
    USD-JPY surged to a major-trend high of 109.46. EUR-JPY and other yen crosses also posted new highs. The yen underperformed after Japan's Cabinet Office downgraded its economic assessment on the back of weak consumption, flat exports and weak industrial output. Japan's all-industry activity index also came in sub-forecasts at -0.2%, and BoJ boss Kuroda repeated that Japan is only halfway to achieving the 2% CPI target. Recent data out of Japan have maintained the view that the BoJ is heading for further monetary stimulus, which contrasts the Fed's course, towards tightening, albeit gradual. We remain bullish on the back of yield differentials. Support in USD-JPY is now marked at 108.96-109.00.

    [GBP, USD]
    Sterling rallied as Scotland voted "No" to independence, avoiding what would have been a chaotic break away from the United Kingdom. Cable rallied to a 17-day high of 1.6525, though has since settled lower, to the mid-1.64s, while EUR-GBP dove to a two-month low of 0.7810. There are reasons that sterling's upside will be curtailed, however. The dust will quickly settle as all six polling companies covering the build-up to the vote had predicted a No vote, and markets will quickly return attention to fundamentals, with benign inflation and wage data this week leaving the BoE on an on-hold-for-now policy stance. There will also be political fallout, with more devolution to Scotland and possible constitutional changes to come.

    [USD, CHF]
    EUR-CHF dipped from levels above 1.21 to the mid-1.20s after the SNB maintained prevailing policy settings after its policy review this week, refraining from implementing negative interest rates. Swiss policymakers had been emphasizing recently that negative rates was an option, so the lack of the move prompted CHF short covering. Instead, the SNB left the three-month Libor target at 0.00-0.25% and maintained its commitment to the 1.2000 limit peg in EUR-CHF. This recent new major-trend low of 1.2044 remains in focus, though the speculative market will be wary of possible SNB intervention. The SNB may find defending the 1.2000 cap in EUR-CHF a tougher proposition in the context of broad euro weakness than it would be in the case of specific franc outperformance.

    [USD, CAD]
    USD-CAD has been seeing some volatile trade, recovering to the 1.1000 area after the Fed raised its interest rate projection. Better Canadian manufacturing data, a recovery in commodity prices helped the CAD earlier in the wake, which put the March major-trend peak at 1.1278 back out of reach for now. Support is at 1.0920-26 (which encompasses a recent low).

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